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President of Russia Vladimir Putin: Let us discuss the results of the Ministry’s work.

Energy Minister Alexander Novak: If I may, I will report on the 2017 performance, Mr President.

First, I would like to say that last year all the fuel and energy sectors showed stable performance and reached even better results than in previous years in technical, economic, industrial and quality indicators, especially in the energy security of our domestic market as well as in reserves of energy resources such as electricity, gas, petroleum products and oil for processing. Despite tough economic challenges, illegal sanctions and difficulties with financing, we saw investment growth in 2017 as well. The total volume of investment into all sections of the fuel and energy complex was 3.5 trillion rubles, which is almost 10 percent higher than in the previous years.

Vladimir Putin: Is that per year?

Alexander Novak: Yes, per year. Fuel and energy sectors maintain leading positions on global markets. The Russian Federation is the leader in oil production and gas export. We are in second place on the world’s coal production and in third place in terms of coal exports. This means we really play an important role in providing energy resources and ensuring energy security as well as the supply and demand balance on all markets.

As for the production indicators, first of all I would like to note the high level of gas production last year: we produced 691 billion cubic metres of gas. This is a record, the best figure over the past 17 years. A growth of almost 50 billion cubic metres of gas. We also have record indicators in exports: we exported 224 billion cubic metres to various destinations, including LNG and pipeline gas to Europe as well as the new routes that are under construction now.

As for the oil industry, oil production reached 546.8 million tonnes, or only 0.1 percent less than in 2016. The decline is due above all to compliance with the agreement between OPEC and non-OPEC countries to ensure a balanced oil market and stabilise global markets.

Mr President, I would like to point out that this decision, which you also supported, has played a positive role not only in balancing the market but also in ensuring additional foreign currency revenues for Russia.

Based on the 2017 results, and due to oil prices that increased by nearly $11 compared to 2016 and reached $54.70 per barrel on average, the Russian budget received an additional 1.2 trillion rubles, and our companies earned some 500 billion rubles more. Total oil and gas export revenues increased by some 31 billion dollars thanks to the higher prices. This also had a positive effect on our investment programmes, our companies’ stabilisation and on the budget.

Speaking about the coal sector, the overall output reached 409 million tonnes. It is a record high figure for Russia. This was our strategic target for 2020. It is important that we not only satisfy domestic requirements and ensure domestic consumption, but we also have increased exports.

Although global coal consumption is not growing, and coal consumption is relatively low now, Russian coal is a competitive product. The new routes we have developed, primarily in the Asia Pacific, are boosting our competitiveness and deliveries to South Korea. We have increased deliveries to Japan and have coordinated, at long last, deliveries to China. The problem had to do with China’s technological analysis of the quality of our coal. This problem has been resolved, and we deliver our coal to China now.

I would like to say that, as a result of the investments I mentioned, 55 oil sector deposits came on stream last year. Key deposits include the Erginsky cluster in the Khanty-Mansi Autonomous Area with 258 million tonnes, a new deposit in Krasnoyarsk Territory – Lodochnoye of the Vankorsky cluster and Tazovskoye field in the Yamal-Nenets Autonomous Area. This shows that the sector continues to invest and to develop.

Speaking of the gas sector, you have launched the first stage of the Yamal LNG Plant. This is a real milestone in the development of Russia’s gas sector. Built by a consortium involving Chinese and French partners, the first stage with a capacity of 5.5 million tonnes heralds the initial development of a cluster on the Gydan Peninsula.

As per your instructions, we are now drafting a programme to expand liquefied natural gas production that will allow us to produce and liquefy up to 100 billion cubic metres of gas in this area. Today, Russia controls about five percent of global LNG markets, and we are planning to boost this share to 15–20 percent. Indeed, this is the most rapidly developing market niche that will eventually offer environmentally friendly fuel. Demand for this fuel will grow more quickly.

I would also like to say that electric power stations with a rated capacity of 3.9 gigawatt were commissioned last year. The Yakut electric power station also started operating.

We have continued our programme to build renewable energy sources and to finance them. While in the three years preceding 2017 we commissioned only 130 megawatt of renewable energy sources, last year alone, we commissioned 135 megawatt. It is important that the first windmill has been installed in Ulyanovsk Region. The 35-megawatt facility went on stream this past December. This, too, heralds the beginning of an ambitious windmill construction programme. Such major investors as Rosatom, Fortum, Enel have entered this sector, and foreign investors are showing interest.

The main thing is that the renewable energy construction programme is designed primarily to create competencies in the Russian Federation to produce the necessary equipment. Together with the Industry and Trade Ministry we have determined, the Government has determined, the localisation percentage, and we must reach at least 65 percent of localisation.

Today an entirely new Russian plant has opened in Novocheboksarsk. It will produce solar panels using Russian technology invented by members of the Russian Academy of Sciences. This technology is in the world’s top three technologies in terms of efficiency (heterostructure technology for renewable energy sources). The first stage was introduced in Altai with 100 percent localisation and domestic, Russian-made components.

Mr President, I would also like to say that the transport infrastructure development programme for the Russian fuel and energy complex was also successful last year. We introduced 2,000 kilometres of pipelines and 1,225 trunk pipelines; the overall length of key ones, such as Bovanenkovo – Ukhta, is 1,260 kilometres.

We continued to implement our large infrastructure projects: Power of Siberia and Turkish Stream. These are two key projects designed to diversify the delivery of our energy products. In the future, this is also North Stream 2, which will be implemented jointly with European companies.

In the oil sector, an important development was the launch of two pipelines, Kuyumba – Taishet and Zapolyarye – Purpe, which connected oil fields in the north of Krasnoyarsk Territory and Yamal-Nenets Autonomous Area with our unified oil transportation system. This allowed us to join these fields and deliver their energy resources both westwards and eastwards. We also completed the expansion of the Skovorodino – Mohe pipeline, which we built in accordance with an agreement with our Chinese partners. The total capacity of this pipeline is already 30 million tonnes of oil per year.

Of course, production performance is not the only indicator I want to speak about. I believe that quality and efficiency are vital for the further development of the fuel and energy system. As for individual sectors, I would like to say that we continued to extend the gas supply network and the related infrastructure. The share of consumers connected to the gas supply system has reached 68.3 percent.

As for the oil sector, we continued to modernise oil refineries. We have launched eight plants and the refinery yield has increased to 81.3 percent.

Vladimir Putin: Some companies still need to improve their performance. Take this into account.

Alexander Novak: Yes, Mr President. In fact, the situation in oil refining is not simple, because the falling prices in the framework of the tax manoeuvre, which was approved in 2014, has weakened the sector’s investment appeal.

In the past, we attracted some 250 billion rubles of investment into oil refining a year, whereas the current figure is 150 billion. Acting under your instructions, we are now preparing support measures at the request of companies, which should encourage the refining sector.

We still need to modernise 49 plants; overall, we have modernised 78 plants and can report good performance results for 2017. It was the first year when we fully satisfied domestic requirements for Euro 5 petrol and diesel fuel.

Today we supply the domestic market with low-impact petrochemicals for consumption by the public and companies.

I would like to point out that systemic work is underway to enhance the efficiency of the electricity sector. It involves the consolidation of many territorial grid operators.

The efficiency has improved because electricity losses have decreased by some 2 percent to 10 percent over the past five years. We continue working to reduce the number of accidents during the autumn and winter seasons. The figures are good in this sector as well: in 2017 we reduced the accident rate in the electricity sector by 3.5 percent and in the grid sector by nearly 5.3 percent. This is very important.

I think a very important indicator is access to the infrastructure. This primarily applies to the population, small- and medium-sized businesses, and particularly access for concerns consumers of up to 15 kW and up to 150 kW. Much has been done in the past few years. Today Russia is 10^th in the world in the simplified procedure of linking up to the electricity infrastructure.

Vladimir Putin: We spoke about the suppliers and the cash flows that are involved here. We also spoke about the need to adopt decisions that would streamline this process.

Alexander Novak: Mr President, your instructions on more transparent cash flows have also been fulfilled. A federal law adopted in 2015 (Federal Law 307) toughened requirements for sales companies and set guarantee requirements for the consumers of energy resources. On your instructions, 200 cash settlement centres have already been put into service and are operating with bank support.

Vladimir Putin: How does this function in practice? Is it working?

Alexander Novak: Of course, Mr President. The main indicators that we can operate with is the collection of payments. Today it amounts to 99.2 percent. In other words, mutual sttlements are being made and the funds are controlled not only by the Cash Settlement Centre, also through the work of guaranteeing suppliers with the Market Council. All financial indicators are tracked, there is complete monitoring in this respect.

In addition to this, on your instructions a law on licensing the activities of power supply companies was adopted at the end of last year. The regulations are now being developed and during the year, these companies will be licensed. All of them will go through this procedure.

Vladimir Putin: We also spoke about new technology in the electric power industry.

Alexander Novak: Mr President, in your Address you expressed obviously important ideas on introducing new technology in the electric power industry and other branches of the fuel and energy sector. We are dealing with this and have set ourselves the task of introducing cutting-edge technology in our areas. To achieve this, we can use such instruments as the Modernisation Council. Twenty national projects have been adopted as part of the national technology initiative. I will tell you about them. They concern all sectors. These are key projects. Digital and AI technologies are introduced. Today, we have compiled a programme that will allow our companies to streamline this work, because each of them is trying to do it independently.

But we have already started out on this path. Thus, digital technologies are being applied in field development. For example, GazpromNeft has applied this technology at a field in the Khanty-Mansi Autonomous Area, fully digitalising it. It is now referred to as a ‘smart field’, with AI also taking decisions on the best oil production methods, the further development of the field, as well as on ways to increase the recovery ratio. Digital technology is being installed at oil refineries, as well as in the petrochemical sector. Sibur has recently made a presentation of such technologies.

This is also important for the power sector. I am referring to smart grids and digital substations. The first digital substation has become operational in Krasnoyarsk Territory, in the city of Krasnoyarsk. It made it possible to cut the costs by about 30 percent compared to non-digital substations. This is our future. This sort of technology will be introduced increasingly more often. We must help companies create a common platform, common standards plus a common legal framework. This is what we are doing now together with our companies.

In addition to this, we are implementing a large import substitution programme, which includes the use of cutting-edge technology. For example, we have completed a programme, under which a special technology was created for the Bazhenov Formation. It is a group of deposits in West Siberia with total oil productive capacity estimated at some 2.5 billion tonnes, which is a great deal. Just to show you what this means: 12 billion tonnes of oil have been produced in West Siberia since the 1950s. In other words, this can give West Siberia a new lease of life.

Gazprom Neft, working together with other companies and research organisations with support from the Energy Ministry and the Industry and Trade Ministry, has created a technology for this. It will be tested at a special range in 2018 together with the other companies that will join this project.

We are introducing modern rotary steerable systems for optimising directional drilling while simultaneously acquiring telemetric data. These systems are also based on domestic technology.

One of the most important elements are the hydraulic fracturing fleets, which are being used in oil and gas production more and more frequently. Regrettably, this equipment is not produced commercially in Russia. We have only created a pilot plant. We are now working together with our companies and producers to create two more fleets, to be used in experimental mode. Our task is to substitute up to 80 percent of foreign technology by 2020. This can be done, and we have created some of this technology, so now we will introduce it.

Vladimir Putin: Good.

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